Emerging Asian markets question one-size-fits-all bank rules

Nations such as the Philippines seek a more proportionate approach to level the playing field with global lenders

The noise generated by divisions between Europe and the US over the implementation of a global bank rule tends to deflect attention from Asia, a region that could ultimately benefit from a more customised approach.

Asian regulators, who have typically been rule-takers over the past nine years, need to strike an appropriate balance between risk reduction and credit availability to meet the long-term funding needs of small- to medium-sized companies, trade and infrastructure, and allow financial markets to develop. 

Countries in the region, while not responsible for the 2008 global financial crisis, have more or less committed to implementing regulatory reforms in full, even though some are not particularly appropriate to regional banks.

In many cases, Asian banks have consistently operated with less leverage than their western peers, so higher Basel capital requirements do not pose a challenge. But the sophisticated models on which the large, advanced banks assess their risks and calibrate their capital charges are less relevant for emerging market banks, many of whom are local lenders that are not too big to fail.

Ephyro Amatong, a commissioner at the Philippine Securities and Exchange Commission, said at the Asia Risk Congress in September: “It’s one thing, post the 2008 crisis, to come up with reforms for markets that are already established, but for jurisdictions like the Philippines, where capital markets are growing, it’s a challenge to implement the standards that have been set.”

“We are not talking about repeal, we are not talking about deviation from the financial framework – we are talking about implementing it better. Maybe [by being] more proportionate to the state of where your market is,” he added.

Clearly, it is not necessary to impose the same kind of capital charges on locally active banks as on globally systemic ones. The collapse of these local lenders will not pose a threat to either the regional or global financial system, and smaller banks cannot afford the vast risk departments of their global peers.

Moreover, Asian jurisdictions need room to expand the depth of their markets in a region where businesses are often underserved by financial institutions.

The ratio of credit provided by the domestic financial sector is less than 100% of the gross domestic product in Cambodia, India, Indonesia, Myanmar and the Philippines, according to the World Bank. In developed countries, the ratio is typically around 200% of GDP.

It is probably a good time for Asia to raise its voice and tweak the rules

That’s not all. The face value of corporate bonds outstanding is below 10% of GDP in Indonesia, the Philippines and Vietnam – countries with a combined population of roughly 460 million. And the secondary markets for both government and corporate bonds tend to lack liquidity in most southeast Asian countries.

While the Basel Committee on Banking Supervision has largely shut the door on changes to global bank regulations that have already been agreed, it is probably a good time for Asia to raise its voice and tweak the rules, given there are multiple reviews around.

The Financial Stability Board, the financial regulatory arm of the Group of 20 nations, finalised plans in July for an evaluation of the post-crisis regulatory framework, in what is seen as an attempt to shore up an increasingly fragile consensus.

In the US, the Department of the Treasury has begun a comprehensive review of the country’s prudential and financial market regulations, as requested by President Donald Trump.

There is little evidence that post-crisis regulations have actually inhibited financial markets in the US and yet the government is overhauling those rules. In Asia, where regulators do see signs of the unsuitability of global rules to local institutions, a similar review would surely have even stronger justification.